Going cashless costs YOU much more!

Japan uses cash for an amazing 82 per cent of transactions by value and over 90 per cent by volume.

At a time when the Modi government is attempting to push forward a cashless economy with coercive means, Devangshu Datta explains why cash usage is popular even in nations with good cashless infrastructure (something that India lacks).

IMAGE: In a cashless system, the government makes far larger profits, and users pay much higher costs. Photograph: Matt Siegel/Reuters.

Very little of the commentary on cash versus cashless has focussed on the important point of allocation of costs and profits. In a cash economy, the government pays the cost and takes profits. In a cashless system, the government makes far larger profits, service-providers collect fees, and users pay much higher costs.

It costs about Rs 3.55 to print a Rs 2,000 note. Say, such a note is handed out to a civil servant as part of her salary. The government profits to the tune of Rs 1,996.45. There are no costs for using the note in further transactions, until it is worn out. The government may hope circulation will translate into tax revenue. But there are no guarantees, since there is no audit trail on note usage.

Now let’s say there is a bank transfer of Rs 2,000. Transfer costs are near-zero, using the Unified Payment Interface. The required SMS costs a few paise per transfer (the transaction value could be much more than Rs 2,000). An electronic ledger entry costs near-zero.

The recipient uses that cashless money for some transactions. The bytes are transferred to other accounts, via mobile wallets, credit cards, debit cards, etc. The service providers, enabling every transaction, receive a fee called the Merchant Discount Rate (MDR), set by the Reserve Bank of India. For a credit card, MDR varies from 0.25 per cent for transactions below Rs 1,000 to one per cent for those above Rs 2,000.

The lowest MDR payable on a Rs 2,000 transaction is Rs 20. Unlike banknotes, electronic money can also circulate forever. The MDR far exceeds printing costs. The MDR for a single electronic transaction may be 6x the lifetime cost of a physical note.

There may be an infinity of transactions and every transaction leaves an audit trail, which generates tax revenue. The users pay all costs. The service providers are taxed on profits from MDR; merchants are taxed on profits from transactions; telecom service providers are taxed on revenue from traffic generated by transactions.

Net-net, cashless transactions cost the government much less (near-zero) and generate way more revenues.

At the same time, cashless costs users much more.

People go cashless in prosperous nations because it is unsafe to carry large sums of cash around, and sometimes when they actively desire an audit trail as proof of transaction.

Another nasty aspect of electronic audit trails is the lack of privacy. India, it is worth pointing out, has no data privacy or security laws.

In Scandinavia (Sweden is largely cashless), people go cashless even for small transactions because of high social security. A Swedish citizen knows high tax payouts come back to her since she receives lifelong health care (and a state funeral), pension, free education, free legal representation, etc.

The relative costs -- and the allocation of those costs -- explains why cash usage is popular even in nations with good cashless infrastructure.

Americans use cash for 45 per cent of transactions by volume.

Germans use cash for 80 per cent by volume.

Japan uses cash for an amazing 82 per cent of transactions by value and over 90 per cent by volume. Japan has cash-equivalent to 20 per cent of GDP in circulation (in India it was 13 per cent until November 8). The Japanese prefer cash, since banks offer very low (or negative) interest and charge high MDRs. In addition, it is safe to carry huge sums in law-abiding Japan.

Given the economics, it is no surprise that the government wants cashless transaction, and is attempting to push it by the current coercive means. It is also no surprise that service providers would embrace the drive towards cashlessness.

But what does the user receive in return for the higher revenue being gouged out of her? Does India offer the social security of a Sweden or Germany, the easy business environment of America, or the safety of Japan? Does it offer the privacy or data security of every one of those nations?

It is worth noting that those elements were in place before the citizens in these nations embraced cashlessness.